City to strengthen fund balance policy

The City of Covington is looking to strengthen its fund balance policy to increase flexibility and protect its ability to provide core services to residents during tough budget times. 


COVINGTON, Ky. - Three times since Covington created what it called the Fiscal Stability Ordinance in 2015, two different City Commissions have voted to change the ordinance to make it less unwieldy and more effective. 

Now a third City Commission is discussing whether to make a fourth set of improvements, including changes that would strengthen the ordinance’s core purpose: To institutionalize fiscal discipline and protect City services.
“We wholly embrace the premise behind the ordinance, which was to help officials at City Hall be good stewards of the public’s money,” City Manager David Johnston said. “But we’re continuing to improve the ordinance so that it reflects how cities actually use tax revenues to provide services and so that it doesn’t interfere with what it was actually designed to do.”
At its regular caucus meeting tonight, the City Commission heard a presentation from Finance Director Muhammed Owusu about proposed improvements to the ordinance.
Given the numerous changes made in disjointed fashion over the years, the simplest and cleanest way make the changes is to repeal the old ordinance and create a new chapter in the Covington Code of Ordinances creating policy for maintenance of fund balances, City Solicitor Michael Bartlett said.
As originally passed, the ordinance created several new funds for specific, long-range purposes that pigeon-holed any unspent money at the end of any given fiscal year. (It also reiterated and included the provisions of previously passed ordinances related to insurance premium taxes, investments in equipment and capital projects, and what’s called the Tax Increment Financing or TIF district.)
A series of changes over the years eliminated a couple of those funds, combined others, and temporarily suspended some of the excruciatingly complex formulas for transferring money from fund to fund.
“In almost 30 years of managing public spending, I’ve never seen anything like it,” Owusu said last year when the former City Commission voted to change the ordinance then.
The newest set of proposed changes includes: 
  • Renaming the General Fund Minimum Unreserved Fund (commonly known as “the Rainy Day Fund”) as the General Fund Operating Reserve Fund to more closely match its purpose. 
  • Requiring the City to work toward a balance in the reserve fund equivalent to three months of budgeted operating revenue, an increase from two months. 
  • Restricting the use of the reserve fund to unanticipated, non-recurring needs. 
  • Clarifying that the reserve fund is funded from excess revenues over expenditures (unspent money in any given fiscal year) or one-time revenues. 
  • Requiring that the Commission - if it ever taps into the reserve fund - to simultaneously create a comprehensive plan to repay the “borrowed” money within five years. 
  • Simplifying the complex formulas by which the City transfers money to eliminate problems with timing and honor the deadlines by which a budget is actually approved and its year-end numbers reconciled. The previous language included deadlines that required “best guesses.” 
  • Adding language to clearly establish the City’s budgetary principles and clarify the purpose of the reserve fund. 
The new chapter - in its “intent and purpose” section - says this: “It shall be the policy of the City to establish and maintain a prudent level of financial resources to guard against service disruption in the event of unexpected revenue shortfalls or unpredicted expenditures.”
As originally passed, Johnston said, the Fiscal Stability Ordinance’s language assumed every year would be a boon year, revenue-wise, and didn’t account for the pressures of a down year or any unanticipated expense, such as the state’s crushing mandated increase in public pension costs.

“It sounds basic, but Covington needs to be able to use the so-called Rainy Day Fund during those proverbial rainy days to maintain critical services like protecting the public, putting out fires, fixing streets, and creating jobs,” he said. “Providing those services is the whole point of City government. At the same time, we’re codifying the requirement that if we ever were to use any of those ‘rainy day’ funds, we have to have a plan to pay that fund back.”
Owusu reiterated that tapping into the General Fund Operating Reserve Fund would be a last resort. “We don’t look to touch this money at all, unless we have to,” he said.
After a brief discussion, the City Commission moved to put the issue on its agenda for first reading at its next legislative meeting on Tuesday, Feb. 26.
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